Finance Portfolio Management

This document provides answers to questions related to finance portfolio management. It discusses concepts such as consumer sovereignty, profit maximization, perfect competition, wealth maximization, and profit maximization. It also explores the impact of fiscal policy, monetary policy, and supply side policies on economic prosperity. Course code: N/A, Course name: N/A, College/University: N/A

Running head: FINANCE PORTFOLIO MANAGEMENT
Finance Portfolio Management
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1FINANCE PORTFOLIO MANAGEMENT
Table of Contents
Answer to question 1:......................................................................................................................3
Concept of Consumer Sovereignty:.............................................................................................3
Profit maximization objective and perfect competition:.............................................................3
Equilibrium price determination and Consumer sovereignty:.....................................................4
Consumer Sovereignty Vs Profit maximization:.........................................................................4
Answer to question 2:......................................................................................................................5
Perfectly competitive market structure:.......................................................................................5
Answer to question 3:......................................................................................................................8
Wealth maximization Vs Profit Maximization:...........................................................................8
Comparison between Wealth Maximization and Profit Maximization:..................................8
Superiority of Wealth Maximization over Profit Maximization:................................................9
Answer to question 4:....................................................................................................................10
Fiscal Policy:.............................................................................................................................11
Monetary Policy:.......................................................................................................................11
Supply side policies:..................................................................................................................11
Decreasing Tax burden:.........................................................................................................12
Labor Market Flexibility:......................................................................................................12
Privatization:..........................................................................................................................12

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Trade and Labor Union Relationships:..................................................................................12
Environmental Policies:.........................................................................................................13
Answer to question 5:....................................................................................................................14
Sub part a:..................................................................................................................................14
Sub part b:..................................................................................................................................14
Sub part c:..................................................................................................................................15
References and bibliography:........................................................................................................16

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Answer to question 1:
Consumer sovereignty implies that, the buyer is having the full power to choose any
product and the source or the supplier of that product from options available to him. It influences
the production decisions of the producers. Profit maximization is the concept of overall objective
of the producers. A producer having the profit maximization objective strives at producing the
goods in a cost efficient manner with the minimum cost, thereby earning the maximum profit.
Concept of Consumer Sovereignty:
The main feature of a perfectly competitive economy is the numerous buyers and sellers
and their freedom of buying and selling decisions. Such situation can only arise, if there is a
complete flow of information in the market and all the participants of the market are fully aware
of the prevailing market situations. As numerous sellers are selling identical goods, sellers can
choose any one of and they take the decision rationally and select the seller with most favorable
product offerings. The choose supplier who are quoting suitable terms with highest quality
products.
The degree of consumer sovereignty varies with the market structure and some other
market conditions. In a perfectly competitive market, consumers enjoy highest consumer
sovereignty. On the other hand, in a monopoly market, they enjoy very less degree of consumer
sovereignty. In all other market situations, it depends on certain conditions and degree of
dependency.
Profit maximization objective and perfect competition:
Producers are producing goods and delivering goods to the consumers with the objective
of earning profit. Some authors and entrepreneurs consider the wealth maximization should be

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the sole objective of the business, on the other hand some producers prefer the profit
maximization as their sole objective. However, they can earn only a normal profit in a perfectly
competitive market, as there is a complete freedom entry and exit for the producers. As all the
producers are selling some identical goods, they cannot charge a higher price from the
customers. To achieve their objective, they only can adjust their quantity of production and
supply. In addition, they can make their production process effective and cost efficient through
innovations to reduce the cost of production, which will increase their profit.
Equilibrium price determination and Consumer sovereignty:
In a perfectly competitive market, no single buyer or seller can influence the price of the
product. Buyers can only make the decision of to buy the goods or not to buy the goods. On the
other hand, sellers can only adjust the quantity of supply. The equilibrium price is determined by
the market forces and the joint effect of demand and supply. If at any point of time, demand is
more than the supply, then by the joint effect of demand and supply, the price will increase and
the producers will earn a supernormal profit temporarily. Many other producers will enter into
the market in attraction of the supernormal profit, thereby increasing the total supply in the
market with their increased individual supply. It will cause the price to fall again, and inefficient
producers will stop their production and leave the market, as they would be incurring losses. In
this process, such a price is prevailed in the market for a long term, which makes the demand and
supply equal.
Consumer Sovereignty Vs Profit maximization:
Consumer sovereignty means the full freedom of consumers to choose any product from
different alternative products. Profit maximization is considered to be a bad practice for any
business, but it may not always go against the consumer sovereignty. In certain situations, it can

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prevail in a market side by side. If the producer is efficient and produce the goods in mostly cost
effective way, they can earn maximum profit without harming the consumer sovereignty (Jones
and Felps 2013).
Answer to question 2:
Consumers are buying goods and taking services from various sellers and service
providers as per their choice. For each class of goods or service there are various alternative
options and sources are available to the consumers. For example, a person can buy groceries
form a Tesco’s retail outlet or from a Sainsbury’s shopping outlet. Same thing happens in the
service sectors also, one can book a British airways’ flight ticket or Qantas’s flight ticket for the
journey. Consumers can avail such degree of freedom in choosing their supplier of goods and
provider of services only in the perfectly competitive market structure.
Perfectly competitive market structure:
Perfectly competitive market is such a situation, where numerous sellers are offering
identical goods and numerous consumers are buying products of their choice. In such a market
structure, buyers and sellers enjoy a complete freedom of their buying or selling decision.
Producers can enter into the market at any time without any barrier and they can exit from the
market without any justification to anyone. Consumers are also free to select the product and
suppliers according to their needs and preferences. On the other hand, perfect monopoly is such a
situation, where consumers are dependent on one single seller and they need to buy goods at the
price quoted by the seller. In present business world, where the technology is easily accessible,
continuous innovations are taking place and there is a perfect mobility of information and
resources, a perfect monopoly is a rare situation.

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In a perfectly competitive market situation the affect and impact of demand and supply
on the equilibrium price of goods is imported. Demand and supply is the main driving force in
the perfectly competitive market and it has greater impact on decisions of both the buyers and
sellers. It determines the equilibrium price and guides the produces in production decisions.
Recent empirical studies have shown that the UK consumer goods market is an example
of a perfectly competitive market and it is growing with the same pace. In most of the goods and
services industries, numerous companies are offering identical goods and services. Some
empirical examples can be given as follows.
Figure 1: Market share of UK Grocery market.
Figure 2: Market share of UK Automobile Industry

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Figure 3: Share of the soft drink market in the UK
From the above empirical data and graphs it can be noticed that in most of the market
segment of UK, there are numerous producers and sellers who are operating in competitive
situation. The most efficient companies are capturing a huge market share and performing with
financial and operational Excellencies.

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Answer to question 3:
Wealth maximization Vs Profit Maximization:
Every organization is having their overall objective for their business. Some of them
adopt the wealth maximization as their sole objective and some of them consider the profit
maximization as their objective. Profit maximization is an old concept where an organization
strives to earn maximum possible profit. On the other hand, wealth maximization aims at
sustainable growth and increasing overall value of the firm (Young and Makhija 2014).
Most of the organizations follow the wealth maximizations as their sole objective and it is
justified on the ground that, it takes care of the value of owners as well as it considers the social
responsibility. On the other hand, the profit maximization objective emphasize only oh the profit
aspect of the business it ignores the social responsibility aspect of the business. For better
understanding, a side-by-side comparison and contrast can be done in the following table.
Comparison between Wealth Maximization and Profit Maximization:
Wealth Maximization Profit Maximization
Overall
objective
The wealth maximization objective
of any organization strives at
maximizing the market value of
shares thereby increasing the value
of the business.
On the other hand, profit
maximization objective focuses on
short term profit over the long term
sustainability.
Consideration
of time value
of money
The Wealth maximization concept
considers the time value of money.
It focuses on a long term
The profit maximization concept
ignores the time value of money.

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perspective
Frequency of
returns
Wealth maximization concept
focuses on returns over a longer
period of time
On the other hand, the profit
maximization focuses on short-term
profit only.
Consideration
of
shareholders’
interest
Wealth maximization safeguards all
the stakeholders’ interest. It ensures
timely payment to the lenders,
consumers’ interest, employees’
fair remuneration and a fair return
to the shareholders.
It focuses on overall profit only. It
ignores the stakeholders’ interests and
shareholders long-term growth.
Long term
effectiveness
Wealth maximization focuses on
sustainable growth of the business, it
focuses on long term success of the
business`
It never considers the sustainable growth
of the business.
Superiority of Wealth Maximization over Profit Maximization:
Organizations need to consider their overall business objectives while making certain key
decisions. Capital Budgeting decisions like, dividend policy, source of capital and capital
structure depends on the overall objective of the organization. Organization having wealth
maximization as their sole objective sets their capital structure in such a way, which will lead to
a long-term growth of the organization. On the other hand, organizations with profit
maximization as their sole objective, arranges their capital structure and dividend policies in such
a way that will increase their overall profitability only (Jones and Felps 2013).

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To achieve their objective of profit maximization, organizations take some decisions,
which ignore the interest of various stakeholders; sometimes it affects the stakeholders’ interest
adversely. It emphasizes only the short-term profit without considering the future profitability,
risk and time value of money.
Wealth maximization as the sole overall objective of the business is accepted widely by
most of the organization. It takes in to account the overall value of the business and emphasizes
on increasing the market value of shares. It takes into account all the future expected cash
inflows and cash outflows and risks associated with it. In this concept, the value of the firm is
calculated taking into account the future expected cash inflows subject to the time value of
money. It also takes into account the risk factors while calculating the present value of the
organization. Wealth maximization concept makes a balance in between the firm’s interest and
the stakeholders’ interests.
From the above analysis and discussion it can be concluded that, wealth maximization as
a sole objective of the business, ensures organization’s as well as stakeholders’ interests, and its
emphasize on sustainable and long term growth makes it popular worldwide.
Answer to question 4:
Economic prosperity aims at having enough economic resources. To be economically
prosperous, the citizens of the country need to have adequate amount of income for availing a
good standard of living. The government of any country needs to take certain key initiatives,
which will make the economy of the country prosperous in terms of economical, political factors,
earnings opportunities and economic growth. Economic policies taken by the Government can be
classified in two broad heads, which are demand side policies and the supply side policies.

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Demand side policies include fiscal policy and monetary policy; on the other hand, supply side
policies include privatization, labor laws, deregulations and tax cuts (Sims 2016). Economic
policies taken by the UK government can be discussed as follows.
Fiscal Policy:
To control the economic activities of a country, the government of the country needs
have certain initiatives; those initiatives are known as the fiscal policy. It includes changing tax
structures and tax rates, government expenditures, which influences the economic growth of a
country. Fiscal policies can be classified into Expansionary policies and Deflationary policies.
Expansionary policies aims growth rate of the economy and Deflationary policy strives for
reducing the price inflation and stabilization of the economy (Hansen 2013).
Monetary Policy:
Monetary policies are the more useful tools for controlling the inflation in an economy.
Monetary policies include changing interest rates and changing various bank rates. Monetary
policies affect the fund circulation in an economy and it helps a country in controlling the
inflation and other economic activities of a country. UK government has taken various initiatives
in different times for controlling the economy of their country (Sims 2016).
Supply side policies:
Supply side policies means, mobilizing labor forces and economic resources in the
economy, which will increase the production and supply in the market. It is also helpful for an
economy in achieving a prosperous economic growth. Initiatives, included in the supply side
policies of a country, can be described as below.

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Decreasing Tax burden:
Decreasing the income tax burden on citizens of a country motivates workers to work
more, which will increase the supply of labor in the economy. On the other hand, excessive tax
burden on the workers, will de-motivate them to work. Therefore, lowering the income tax
burden will help in increasing the labor supply and production of an economy.
Labor Market Flexibility:
Flexibility in the labor market helps in mobilizing the labors from one place to another
place. It aims at making available adequate labor forces for production process.
Privatization:
Privatization means giving the ownership of some key manufacturing organizations to the
private owner. It helps in efficient and effective production and it increases supply of products in
the market of an economy. UK first adopted the privatization in the years 1979-81, and from that
time until now the government is emphasizing on privatization as a supply side policy to support
the economic growth.
Trade and Labor Union Relationships:
Labor unions always have some effect on the labor forces of the country. In UK also in
the initial stages, there was no such positive influence of the labor unions, which could have
helped the labors and the producers. Later on with certain initiative by the UK government to
increase the positive relationships between the trade union and the management, government was
able to strengthen the productive workforce in the UK.

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Environmental Policies:
Business organizations are some social establishment, which operates in the society to
serve the needs of the society. Government should take such initiatives, which will help in
sustainable development of the environment, so that the business organizations also have a
sustainable growth in a suitable business environment.
Initiatives taken by the UK government in different times helped the country to achieve a
1.4% GDP growth rate in 2018, and the per capita GDP was $42,616 in 2018. There are many
other government policies which has been taken by the UK Government, helped the country to
achieve a prosperous and a sustainable economic growth (countryeconomy.com 2019).
Answer to question 5:
Sub part a:

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Sub part b:
Sub part c:
From the above table it can be observed that both the projects are having a negative Net
present value, but ht project B is having less negative NPV than the project A. Hence, the project
A should be selected.

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UK. Procedia CIRP, 52, pp.46-51.

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